You earn $1,000 this week. You spend $650 on consumption items (rent,* food, gasoline, a new pair of jeans) and save – you admirably prudent person you – $350. You use this $350 to buy three shares of stock in Apple, Inc. (which are priced today at just over $116 per share).
This article first appeared at FEE.org
The rest of the world – the non-you world; the economic entity that we might call the “non-youers” – has, as result of your transactions, a trade deficit with you this week of $350, and you have a trade surplus of exactly the same amount with the non-you world. You exported to non-youers $350 more of goods and services (that is, of whatever it is you produced to earn your weekly income) than you imported from non-youers.
If mainstream media and most pundits are to be believed, you should be ashamed. You must be up to no good! You must be trading unfairly! You must be stopped!! Leaders of the non-you world call upon you to mend your frugal ways. But you, possessing an independent turn of mind, laugh at the non-youers. “I’ll spend and save as much as I choose,” you defiantly shout back at them across the boundary that separates your household from the non-youers.
The non-yourers are disturbed and worried. They hold conferences at which prominent experts inform audiences that what the audiences all already think they know is in fact unassailably true: the non-yourers’ trade deficit with you is proof that you’re an unfair trading partner and that the non-youers’ trade deficit with you also is proof that the non-youers must revamp their trade and economic policies in order to prevent this calamity from continuing.
The non-youers – in unison, and behind their bellowing president-elect who campaigned on a platform of making non-youers great again in part by eliminating non-youers’ trade deficit with you – denounce you and erect penalties on all non-youers who trade with you until you credibly commit to stop saving and investing so much in the non-yourers’ economy.
You laugh at the silly and economically ignorant non-youers. They, swathed in their blanket of economic ignorance, continue to snarl angrily at you for your dastardliness and to penalize themselves for hiring you to produce valuable outputs for the non-youers to consume.
* UPDATE: Although purchases by foreigners of real estate are recorded on the capital account, and thus contribute to a country running a current-account deficit, I above include rent as a personal consumption expenditure (that is, as an expenditure recorded on the current account). I do so because – although a rented residential apartment is real estate – the renter does not, by paying rent, thereby acquire ownership of that real estate. But in the end this classification is an accounting convention. There is no reason why the payment of rent could not, or should not, be classified as an acquisition of title to real estate. After all, the tenant who pays her rent on time and honors the other terms of the rental contract does acquire the right to occupy and use, according to the terms of the rental contract, her apartment for the duration of the lease. That is, the tenant’s payment of the rent confers upon her ownership of the right to occupy her apartment.
It is not conventional in Anglo-American law to classify such a contractual right as ownership of the real estate, and I have no problem with this convention. Yet it does show the economic arbitrariness of fretting about trade deficits. In my little example above, if rental payments for real estate were recorded on the capital account, then your trade deficit with non-youers would be even larger than $350; it would be $350 plus whatever rent you paid that week. Of course, any such reclassification would change nothing substantively about the economics of the matter.